Insolvency practitioners: When is it reasonable to continue litigation?

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Key points

  • Insolvency practitioners must exercise care and diligence in their role, including in deciding whether to commence or continue litigation.
  • A relevant consideration is whether the amount of the potential recovery is proportional to the costs involved.
  • However, where an obstructive defendant causes costs to become disproportional, that does not necessarily mean that continuing the proceedings is unreasonable.

A recent judgment of the South Australian Supreme Court offers some guidance for insolvency practitioners considering whether to commence or continue litigation in their role as external administrators, particularly in circumstances where a defendant resists recovery proceedings in a manner calculated to cause maximum expense and delay.

The judgment states that a liquidator should be afforded a degree of latitude in their approach to a defendant who employs such a tactic. That is to avoid creating a situation where an obstructive defendant can force a liquidator to abandon a meritorious recovery action by strategically increasing the costs of the action.

Allegation of breach

The Australian Securities and Investments Commission (ASIC) alleged that a liquidator breached his duties under section 180 of the Corporations Act 2001 by continuing court proceedings where no reasonable person in his position would have done so. The Court found that the alleged breach was not made out.

ASIC said that the liquidator should not have continued the proceedings in circumstances where, among other things, the amount claimed was small (AU$28,000) and the legal costs, past and future, were in the hundreds of thousands.

Breach not made out

The Court agreed that proportionality was a “guiding consideration” as to whether litigation was reasonable. However, it declined to “reason backwards” from disproportionate legal costs to find that the litigation was necessarily unreasonable, and observed that the decisions to be made by the liquidator were not simple, for example:

  • At the time the proceeding was commenced, it was reasonable to expect that the claim would be relatively straightforward
  • The liquidator had received legal advice that the claim was meritorious, and key strategies employed by him during the proceedings were supported by his legal advisers.
  • The significant increase in legal costs was primarily the result of the defendant’s conduct, which generated extended interlocutory processes and multiple appeals.
  • The liquidator obtained substantial costs orders against the defendant during the proceedings, which were relevant to the issue of proportionality.
  • While ASIC alleged that the liquidator should have made more attempts to settle the proceeding, the Court took a pragmatic approach as to whether that was feasible. The defendant commenced a counterclaim which prevented the liquidator from simply discontinuing the company’s claim. The Court found that certain steps taken by the liquidator were designed to put him in a better position to resolve the proceeding and it was open to him to wait for those steps to be finalised, and took into account the intransigent approach of the defendant in assessing whether any attempt at settlement would have been futile.
  • It was also relevant that most of the costs were incurred on a speculative basis, and were not to be paid out of funds which would otherwise have been available for creditors regardless of the outcome.The Court cautioned however that this was only one factor in the analysis; practitioners could not ignore considerations of proportionality on the basis that only their own fees were at stake.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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